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Tue August 14, 2012
The economy continues to slowly limp toward recovery
Last summer, financial commentator Greg Heberlein became more pessimistic about the economic recovery, predicting it would take 10 to 15 years to get back to "normal".
Now that a year has gone by, has anything changed?
Sadly, Greg says we have another 9 to 14 years left to go.
Greg and KPLU's Dave Meyer look at the prospects for a slow recovery on this week's Money Matters.
When the stock market crashed in 2008, Greg, in a fit of optimism, said the economy would take 5 to 10 years to fully recover.
That alone is somewhat extraordinary. Recessions normally last 18 months or less. Getting all phases of the economy back to good health might take three years.
Not this time!
The bubble that burst four years ago was over-inflated to the nth degree. Economic growth over the previous quarter century was unabated. Irrational financial exuberance, fueled by record low interest rates, prompted consumers to take on too much debt.
To be sure, economic expansion – the best omen of a better economy – is under way. Improving unemployment data, coupled with numerous other positive statistics, suggest the road to recovery may now be paved.
The stock market – a leading economic indicator – actually has shown signs of testing its all-time high. The market has doubled since the low point three years ago.
That suggests even a 5-to-10-year recovery may have been too pessimistic.
That suggestion would be wrong.
First, we’re only a few months away from completing five years into this mess.
Second, the recovery is anemic. It doesn’t matter where you look – home construction, gross domestic product, consumer spending – the numbers are up, but only fractionally. A confident public, spending on all fronts, remains absent. Corporations, seeing little demand, sit on $2 trillion.
Third, the Congressional stalemate not only remains, it has become more severe.
Fourth, and possibly the game-changer, Europe’s economy, which looked salvageable a year ago, worsens. Forecasts of a total collapse, unthinkable last year, abound. Resultant damage to the U.S. economy could run into the hundreds of billions of dollars, perhaps a trillion or more.
Gloomy Greg has not changed his view: 10 to 15 years for a worthy recovery.
What should you do?
- Increase savings. Setting aside more cash can give you a cushion to weather the worst. Americans have done a good job since the 2008 market crash by doubling the savings rate to 3.5%, but more in scary times makes sense.
- Defer major expenditures. If you’re considering significant purchases that can be delayed, delay them Put off that big vacation or home remodeling project.
- You should have done this already, but prepare for what you’d do if your job disappears. Update your resume, identify those who can give you a good recommendation, look at not only your own industry for your next job, but companion industries. Consider contracting or starting your own business.
- Avoid longer-term investing. Make sure you can access cash quickly. Unless you can afford it, don’t put money in stocks or bonds you’d have to sell at a loss. Buy shorter-term CDs to cut down penalties if an emergency occurs.
- If you’re considering retirement soon, prepare to adjust the date. Working another six months could be the difference between depleting your cash reserves and surviving with something left in the bank.
Hope for the best. Prepare otherwise.